1960s >> 1960 >> no-667-march-1960

Economic Notes: Keynesians and the Bank Rate

The economists and financial experts are nearly all Keynesians now, and have been for many years. It is part of the Keynesian technique that when production is running at the full capacity of machines, resources and men, and unemployment is at a minimum, workers must be persuaded not to press for wage increases, and the expansion of production must be damped down. The increase of the bank rate to 5 per cent. was one step in the process, mainly designed to discourage some of the plans to expand manufacturing capacity, by making borrowing more costly. The other step was the warning given by the Chancellor of the Exchequer against wage claims and increases of profits.


The followers of Keynes are quite convinced that their schemes for managing capitalism smoothly are theoretically sound and practicable. But one of their difficulties is that they can rarely agree on what to do in any particular situation and when to do it. So on this occasion Sir Oscar Hobson reproves The Times and others for criticising the Chancellor’s action. He wrote:


  The Bank fate rise, has met with some criticism. The Times labels it “much caution,” suggests that an increase of half per cent. would have been enough and that the “authorities” having in previous years moved “too little and too late” are now falling into the contrary mistake of acting precipitately. My own assessment would be the opposite to this, namely, that if they are erring at all it is in the same direction as before. Instead of delivering an advance warning at the Mansion House in the autumn and then waiting until the third week in January before raising the Bank rate fas they did in 1954-5 and now again in 1959-60) they would have done better to raise the rate without warning (Stock Exchange Gazette. 29/1/60.)


Other critics of the Chancellor are saying that he has misread the situation and ought not to have raised the Bank rate at all.


Railway Wages
Sir Oscar Hobson says that while the Bank rate may be “no instrument for dealing with ‘cost-push-inflation’ springing from excessive wage demands,” the 7 per cent. Bank rate of September, 1957 “was effective in greatly moderating the 1958 round of wage demands.” The Economist (30/1/60) in an article “Here we are Again?” wants the Government to resist further wage claims, starting with the Railwaymen. It accuses Mr. Bevan of having helped to promote a crisis in 1951, when as Minister of Labour, he “surrendered” to the Railwaymen, and the Conservative Government of having done the same in 1955, and demands firmness now about railway wages. It quotes as a good example “the way in which Londoners withstood the bus strike” in 1957 and thus discouraged other claims for wage increases. It returned to the subject a week later, saying: “If Sir Brian Robertson had given an immediate wage increase to the N.U.R. on Friday last week, it is highly probable that the country would have been sent gently careering again up the well-trodden spiral of inflation.” So the Railwaymen, many thousands getting less than £8 a week, are to be held responsible for the past and future rises in prices.


The Labour Party, being in opposition, condemns this attitude, but they are Keynesians too. It was their Government in 1945-1951 that made “wage restraint” a first-line policy and they have declared that if returned to office they would again seek trade union agreement on this issue.


They might reflect on the admission of a writer in the Economist (24/10/59) that “right at the base of Keynesian theory is the psychological datum that workers will acquiesce in a very considerable decline in real wages, by way of a higher price level, without reacting as they do to any prospect of a cut in money wages.”


The excuse of the Government always is the baseless one that wage claims are the cause of inflation. Quite apart from this, however, the twenty year rise of prices would still show the failure of the Keynesian doctrines that were embodied in the 1944 declaration of the three parties in the National Government, in which they affirmed their intention to maintain a stable price level.


Knocking at Keynes
In 1957 when Mr. Thorneycroft resigned from the Government, Mr. Enoch Powell, Financial Secretary to the Treasury, resigned with him. The general belief was that they wanted a tougher financial policy from the Government and resistance to wage increases. Mr. Powell, writing in the Financial Times (7/1/60), now attacks the claims of the present Chancellor of the Exchequer that Government policy in the 1959 budget brought about the expansion of trade and production.


He shows that the Government’s particular monetary policies had no effect whatever. He points but that the expansion was already going on and that a similar expansion was going on in the world generally, irrespective of the fact that other governments were following quite different policies. He was saying, in effect, that it was the normal trade cycle operating as it has throughout the history of capitalism.


He concludes:—


 Once again we have been denied the privilege of observing at first hand a British Government coping with a recession on orthodox Keynesian lines. We still do not know experimentally what would be the result if, in the face of a persistent fall in propensity to spend, a British Government equally persistently increased its expenditure, and financed it by the creation of money through the floating debt. At any rate that was not the history of the 1958-60 recovery. The upturn got there before the Government: the patient was up and playing golf before he could swallow the medicine; and we must await some other opportunity to ascertain by experience whether the prescription is beneficial, poisonous—or simply neutral.


The only thing Mr. Powell overlooks is that, if the recovery took place without the aid of the Government’s medicine, it also took place without the alternative medicine that he presumably considered necessary.


Rise in Profits
In the meantime investors arc doing very well. The Financial Times (4/2/60) discloses that 109 industrial companies which published their reports in January showed an average increase of 6-7 per cent. in profits as compared with a year earlier, that earnings available for ordinary shares were up by 13.6 per cent. and the dividends actually distributed to ordinary shareholders were higher by 30 per cent.


Too Much Hardship?
Two quotations from The Observer (7/2/60). the first being its proposal for limiting the expansion of production:


  . . . there is a case for trying to moderate the housing boom: it is now going ahead very fast, and some building could be postponed without causing too much hardship. (Page 2.)
Last year five million people were wailing for new council housing, two million of them classed as “urgent needers”: in 1956 the L.C.C. had only 300 three-room flats to offer to nearly 72.000 families who required them. (Page 16.)


Edgar Hardcastle